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Markets Tread Lightly

After a rousing first quarter, stocks carried the momentum into the first day of trading in the new quarter on Monday, but the tone turned decidedly more cautious later in the week as investors focused on two familiar themes: earnings and Europe.

Earnings season starts next Tuesday when Alcoa (NYSE:AA) reports its results. Already flash memory maker SanDisk (NYSE:SNDK) lowered revenue expectations for the current quarter to $1.2 billion, which would be 8%–11% lower than previous expectations for $1.3 billion–$1.35 billion.

This is notable for a couple of reasons. First, SanDisk’s products are used in a wide range of consumer electronics, including cellphones, tablets and digital cameras. In addition, it follows disappointing revenue guidance last month from a couple of important semiconductor companies, Texas Instruments (NASDAQ:TXN) and Altera (NASDAQ:ALTR), so the evidence points to a possible slowing of wireless device sales.

None of these early announcements mean the wheels are falling off the wireless industry or technology as a whole, but it does look as if growth may be slowing at the moment. With NASDAQ up over 33% since last October’s lows, it is due for a bit of a breather, and we may be seeing that now with this news. We will be watching upcoming earnings closely, not just in technology but across all sectors.

Weakness in Europe added to the overall caution as 10-year Spanish debt got a lukewarm reception from investors. Bond prices fell, and yields moved back up to 5.6%. That’s still well below 7% last November, but we’ll also have to keep an eye on Europe and especially Spain.

Under its new budget revealed last week, Spain’s debt-to-GDP ratio stands at 79.8%, higher than the European Commission’s forecast of 73.8%. That ratio is not as high as in other countries in Europe – Germany’s is 83.2% and Italy’s is 120.1% – but Spain’s economy is very weak. Some project unemployment as high as 25% for 2012, which raises concerns over whether the country will see enough revenues to prevent debt from spiraling out of control.

Investors were also in a selling mood because the minutes from the latest Fed meeting indicated that the chances of additional quantitative easing (QE) are shrinking. QE is always positive for stocks, but if the Fed appears to be moving away from it, it’s because of improvement in the U.S. economy. Still, the Fed has long been cautious about the recovery, so I think additional easing would move right back to the front burner should Chairman Ben Bernanke and company see the economy weaken.

None of these are new concerns for investors, but they have been in the spotlight again the last few days. We’ll keep a close eye on all of them, but most important of all, the earnings reports and guidance we’ll get over the next few weeks will tell us what the companies themselves see right now.